Interdependent Preferences and Reciprocity

Experiments, ethnography, and introspection provide evidence economic agents do not act to maximize their narrowly defined self interest. Expanding the domain of preferences to include the utility of others provides a coherent way to extend rational choice theory. There are two approaches for including extended or social preferences in strategic models. One posits that agents have extended preferences, but maintains the conventional assumption that these preferences are stable. Prominent examples of this approach permit agents to exhibit concern for status, inequality, and social welfare. The other approach permits the strategic context to determine the nature of individual preferences. Context-dependent…